Mastering Megatrend Investing with Nimesh Chandan

Summary

In this podcast, Nish Chandan, the architect of the Bajaj Finserv Flexi Cap Fund, discusses the concept of megatrend investing, a strategy that has shown significant success in the fund's first year. Chandan explains that megatrends are long-term economic and business changes that can act as tailwinds for growth in certain sectors. He outlines six sources of megatrends: technology, regulatory, economic, nature, demographic, and social changes. The conversation highlights the importance of active monitoring of these trends for long-term investment success, contrasting the proactive megatrend approach with the more passive buy-and-hold strategy. Chandan also shares insights into current megatrends in India, such as financialization, digitization, pharmaceuticals, and real estate, which are driving growth and offering exciting investment opportunities.

Takeaways

• 📚 The concept of megatrends dates back to 1982 with John Naisbitt's book 'Mega Trends', which discussed long-term economic and societal changes.
• 🌐 Megatrends are global shifts impacting businesses and economies, not limited to a single country, and can act as a tailwind for growth in certain industries.
• 🔄 The idea of 'Buy and Hold' investing has evolved into 'Buy and Watch', emphasizing the importance of monitoring trends to ensure the reasons for investment remain valid.
• 💡 Megatrends are identified through six sources: Technology, Regulatory, Economic, Nature/Sustainability, Demographic, and Social changes (TRENDS).
• 🚀 Megatrend investing focuses on future winners and losers, contrasting with index funds that are typically backward-looking and based on past performance.
• 💼 The fund manager, Nesh Chandan, discusses how megatrends can be a powerful tool for long-term investors to identify and capitalize on significant economic shifts.
• 💹 The podcast highlights how certain Indian companies benefited from megatrends like offshoring in IT and retail lending boom, leading to substantial wealth creation for investors.
• 🏦 The financialization and digitization trend is a current focus, with increased investments in financial savings and advancements in banking and financial services technology.
• 💊 The pharmaceutical sector, particularly contract research and manufacturing, is another megatrend, influenced by regulatory changes and a shift in drug development from China to India.
• 🏡 The real estate sector is undergoing a megatrend due to consolidation, with branded developers gaining market share and the market showing signs of recovery and growth.
• ⚡️ The power sector, especially renewables, is a megatrend with significant growth potential, as India moves towards cleaner energy sources and infrastructure development.

Q & A

What is the concept of megatrends in investing?

Megatrends are long-term changes in the economy and businesses that have an impact on everyone. They are not country-specific and can act as a tailwind for businesses that align with them, aiding in growth, or as a headwind for those against them, necessitating adaptation or change for survival.

How old is the concept of megatrends?

The concept of megatrends dates back to 1982, with the publication of the book 'Megatrends' by John Naisbitt, which discussed the benefits of investors looking at trends happening in Asia.

How has the perception of Buy and Hold investing changed in the context of megatrends?

The perception has evolved from a passive Buy and Hold strategy to a more active 'buy and watch' approach. Investors are encouraged to monitor the trends impacting businesses to ensure the reasons for their investments remain valid.

Why should an investor be concerned about megatrends?

Investors should be concerned about megatrends because they can significantly influence a company's profit growth over the long term. Identifying and investing in companies that benefit from these trends can lead to substantial wealth creation.

What are the six sources of megatrends?

The six sources of megatrends are technology changes, regulatory changes, economic changes, nature or sustainability, demographic changes, and social changes.

Can you provide an example of how megatrends have benefited investors?

In the late 1990s, technological innovations and the growth of the telecom industry enabled remote work, leading to the offshoring boom. Indian IT companies benefited from this megatrend, becoming multibagger stocks for investors.

How does one construct a megatrends portfolio?

A megatrends portfolio is constructed by first identifying megatrends from various sources, then overlaying these trends on sectors to find companies that are on the right side of the trend. Further bottom-up analysis is done to assess the business quality, management, capital requirements, and valuations of these companies.

How is megatrends investing different from index investing?

Index investing is typically backward-looking, focusing on past winners, while megatrends investing is forward-looking, identifying future winners and losers. Megatrends portfolios also assign weight to companies based on their return potential and valuations, rather than their market cap size.

What are some of the exciting megatrends that Bajaj Finserv Flexi Cap Fund is currently investing in?

Some exciting megatrends include financialization and digitization, pharmaceuticals and contract research, premiumization in consumer discretionary due to economic changes, and the real estate sector, particularly the power and renewables opportunity.

What is the role of valuation in megatrends investing?

Valuation in megatrends investing helps to determine whether the trend is already fully priced in by the market and to decide the appropriate weightage for a company in the portfolio based on its potential for long-term growth and current valuation.

Outlines

00:00

📈 Introduction to Mega Trend Investing

The podcast begins with an introduction to Mega Trend investing, highlighting its significance in long-term investment strategies. The concept dates back to 1982, stemming from John Naisbitt's book 'Mega Trends'. It emphasizes the importance of observing long-term economic and business changes that affect global investments. The discussion clarifies misconceptions about Mega Trend investing, distinguishing it from mere macroeconomic forecasting. It underscores the necessity for investors to adapt to these trends to identify businesses that will thrive or struggle, adjusting their strategies accordingly.

05:01

🌐 Sources and Impact of Mega Trends

This section delves into the origins of Mega Trends, which are identified through six key areas: Technology, Regulatory, Economic, Nature, Demographics, and Social changes (TRENDS). It discusses how Mega Trends can create cycles and trends within themselves, influencing various sectors and companies. The conversation provides historical examples, such as the rise of remote work and offshoring in the 1990s, driven by technological and demographic shifts. It also touches on the evolution of Mega Trends, from the IT boom in the late 1990s to the growth of retail lending post-2008, illustrating how investors can benefit from aligning with these trends.

10:02

🏦 Constructing a Mega Trends Portfolio

The paragraph outlines the process of constructing a portfolio based on Mega Trends. It starts with a top-down approach, identifying companies that are positioned to benefit from current Mega Trends. The subsequent bottom-up analysis examines each company's ability to capitalize on these trends, their management quality, and the potential for monetizing the trend. The discussion also covers the importance of valuation in Mega Trend investing, aiming to avoid overpaying for stocks and ensuring that the investment rationale remains valid over time. The approach contrasts with traditional index investing, which is more backward-looking and size-based.

15:02

💊 Current Mega Trends and Investment Opportunities

In this part, the podcast focuses on current Mega Trends that present exciting investment opportunities in India. These include financialization and digitization, which are driving growth in banking and financial services, particularly with the adoption of technology. The pharmaceutical sector, especially contract research and manufacturing, is also highlighted due to global regulatory changes and the potential for India to become a hub for drug development. The discussion also covers the premiumization of consumer discretionary spending, the real estate sector's consolidation, and the power sector's growth, particularly in renewables. These trends are seen as catalysts for wealth creation in the coming years.

Keywords

💡Mega Trend

A Mega Trend refers to a long-term, transformative change in economy, society, or technology that has a broad impact on various sectors. In the context of the video, Mega Trend investing is the strategy of identifying and investing in companies that are positioned to benefit from these long-term shifts. The video discusses how Mega Trend investing can lead to significant growth and wealth creation for investors, as these trends often create tailwinds for certain businesses, as exemplified by the rise of the IT outsourcing industry in India due to technological advancements and demographic advantages.

💡Mega Trend Investing

Mega Trend Investing is an investment strategy that focuses on identifying and capitalizing on long-term, large-scale trends that shape the global economy and society. The video emphasizes how this strategy is different from traditional investing, as it looks beyond short-term market fluctuations and instead focuses on structural changes that can drive growth over decades. The interviewee, Mr. Nesh Chandan, explains how Mega Trend Investing involves forecasting long-term changes and selecting companies that are well-positioned to benefit from these shifts, such as those in the financialization and digitization sectors in India.

💡Buy and Watch

The term 'Buy and Watch' is a twist on the traditional 'Buy and Hold' investment strategy. It suggests that while investors may buy stocks for the long term, they should actively monitor the trends affecting their investments to ensure the reasons for their initial investment remain valid. In the video, this concept is discussed as a response to the changing business landscape where Mega Trends can either bolster or undermine a company's prospects, necessitating vigilant oversight of investment portfolios.

💡Financialization and Digitization

Financialization and Digitization are Mega Trends that are driving growth in the financial sector. Financialization refers to the increasing role of financial markets and institutions in the economy, while digitization involves the adoption of digital technologies to improve efficiency and access. The video highlights how these trends are leading to increased investments in financial savings over physical assets and the growth of capital market businesses, with a particular emphasis on the innovative use of technology by financial institutions in India.

💡Pharmaceuticals and Contract Research

Pharmaceuticals and Contract Research are identified as a Mega Trend in the video, particularly in the context of regulatory changes and global shifts in drug development. The script mentions the 'Bioc secure act' in the US, which aims to reduce dependence on China for drug development, leading to opportunities for countries like India that have a strong presence in this sector. This trend is seen as a defensive growth area, with significant potential for companies engaged in custom drug development and clinical research.

💡Premiumization

Premiumization is a Mega Trend that reflects a shift in consumer behavior towards higher-quality, often more expensive, goods and services. In the video, this trend is discussed in the context of rising per capita income and changing lifestyle preferences in India. As consumers increasingly seek premium products, companies that cater to this demand in sectors like consumer discretionary can benefit, leading to potential investment opportunities for those following Mega Trend investing strategies.

💡Real Estate Consolidation

Real Estate Consolidation is a Mega Trend discussed in the video, which refers to the process where smaller players in the real estate market are absorbed or go out of business, leading to a more concentrated market with fewer, larger players. This trend is particularly relevant in India, where a significant number of houses were sold in the previous year, indicating a robust market and benefits for listed property development companies that have gained market share through consolidation.

💡Power Sector and Renewables

The Power Sector and Renewables are highlighted as an exciting Mega Trend in the video, especially in the Indian context. The script mentions investments in significant power-related players that are experiencing substantial growth, driven by the need for energy security and the global shift towards sustainable energy sources. This trend is underpinned by strong revenue and profit growth visibility for the next 3-5 years, making it an attractive area for Mega Trend investors.

💡Top-Down Universe

A 'Top-Down Universe' is a term used in the video to describe the process of identifying potential investment opportunities by first looking at broad market trends and then narrowing down to specific sectors and companies that are poised to benefit from these trends. This approach is contrasted with a 'Bottom-Up' strategy, which focuses on individual company analysis. In the context of Mega Trend investing, the top-down universe is created by screening companies against the identified Mega Trends to find those with the potential for growth.

💡Net Net Beneficiary

Being a 'Net Net Beneficiary' of a Mega Trend is crucial for companies to be considered in a Mega Trend portfolio, as discussed in the video. It means that a company should benefit significantly from a particular trend without being negatively affected by other opposing trends. This concept is important for investors to ensure that the companies they invest in are not neutralized by counteracting trends and can capitalize on the growth opportunities presented by the Mega Trend.

Highlights

Bajaj Finserv Flexi Cap Fund celebrates its first year with a focus on megatrend investing.

Megatrend investing concept dates back to 1982 with John Naisbit's book 'Mega Trends'.

Megatrends are long-term changes in businesses and economies impacting everyone, not just specific countries.

Megatrends act as a tailwind for businesses that align with them, aiding growth.

Buy and Hold investing is evolving into 'buy and watch' due to changing trends.

Active long-term investors should consider megatrends for picking winners over decades.

Profit growth, influenced by megatrends, is a key factor in a company's stock price.

Nifty50 index saw 104 changes in its first 25 years, indicating companies with strong megatrend backing.

Megatrends originate from six sources: Technology, Regulatory, Economic, Nature, Demographic, and Social changes.

Investors have benefited from megatrend investing, with examples from technology and telecom in the 1990s.

The offshoring and outsourcing industry boomed due to technological and demographic changes in India.

Regulatory and economic changes led to a boom in retail lending in India from 2008 to 2018.

Megatrend portfolios are constructed by identifying companies on the right side of megatrends.

Bottom-up screening assesses business quality, management, capital investment, and cash flow generation.

Valuation in megatrend investing helps avoid overpaying and determines portfolio weightage.

Megatrend investing differs from index investing by being forward-looking and weightage-based on potential.

Current megatrends in India include financialization, digitization, pharmaceuticals, premiumization, and real estate.

The power sector and renewables present exciting opportunities within the infra sector.

Nish's book on megatrend investing is available for download on Bajaj Finserv's website.

Transcripts

[Music]

hi and welcome to very special

podcast as you know Bajaj finser flexi

Cap Fund has just completed its first

year so we thought it would be a good

time to look at the year gone by and

focus on something that the fund is very

specifically known for megatrend

investing now who better to quiz on

everything megatrends then the man who

built this unique strategy Mr Nesh

chandan morning NES morning hi and thank

you for taking the time to speak to us

about Mega Trend I have caught you well

before the opening bell so I think we

have time on our side but let's begin uh

so nsh if you could tell me uh you know

the very basic concept of megatrends

what's that all

about actually the concept dates as far

back as

1982 uh there was a book by John nasit

called Mega Trends and it spoke about

how a lot of investors can benefit if

they look at the trends happening in

Asia and how the Asian tigers would do

and a lot of money actually flowed to

Asia at that time uh following the

trends at that time so the concept is

about 40 years old with uh a lot of work

then being done to refine it further

when I came across Mega Trends as a

concept

naive that I was I first thought it's

about uh like you know forecasting a

macro for a country and then investing

in that and I an Indian investor so why

should I bother about Mega Trends but

then slowly and steadily uh as like I

researched more about it I found out

that this is not just about one country

it's about the changes that are going on

in businesses economies and that have an

impact on everybody that's true and

there are certain business businesses

where these Mega Trends act as a

Tailwind okay and help them in growth

and there are certain businesses which

are against these Mega Trends and they

either have to change their business or

do something else to survive so the

concept is about forecasting long-term

changes in the economy and businesses

and that may not be country

specific in one of the conversations I

was having with some of the good

investors uh we decide I mean we started

talking about a topic of Buy and Hold

investing and uh to my

surprise all these investors started

saying the Buy and Hold strategy is

dead and I got me a bit worried like you

know when we are talking about Equity

investing we are talking about Buy and

Hold investing then I understood the

perspective a little better they were

not against long-term invest right but

the concern was that because of these

Trend changes right a lot of businesses

the way the reason that you invest

invest in them that reason may not

survive so it's better to keep watching

these Trends and then invest so what I

took away from that was that Buy and

Hold investing has actually turned into

buy and watch you buy for a longer term

sure but you keep a watch on the

important Trends impacting businesses to

ensure that the reason that you invested

in that business stays the same

understood very interesting but n tell

me you're a fund manager and and and

this makes a lot of sense why should an

investor be uh you know concerned about

Mega Trends that's a very interesting

question if you are a true active

long-term investor and you want to pick

winners over many decades or many years

it is important to invest on Mega Trends

right there are a lot of factors affect

a company stock price but in the longer

run one of the most important factors is

the profit growth of that company

and profit growth depends on whether the

company is able to capitalize on the

opportunity that it has those

opportunities are created by Mega Trends

if you see from 1995 or

96 when nifty50 index came right every

year almost there are four to five

changes so in the first 25 years they

had 104 changes which means about four

average a year which are the companies

that actually survive through these

decades and stay in the index or create

wealth over a longer term for investors

you'll invariably find that many of

these companies have a strong Mega Trend

backing them which gives a Tailwind to

their growth which ultimately leads to

profit growth and wealth creation for

the investors interesting now that you

say that um about these companies having

a mega Trend backing them in today's day

and age uh Mish it's very easy to

classify anything as a trend right what

in your mind are the real sources of

Mega Trends so that's very interesting

uh Mega Trends uh need to be longer term

and in fact Mega Trends create Trends

within themselves right uh a short-term

move around the average is called a

cycle right uh a cycle when it is in a

direction it becomes a trend right a

mega Trend actually create many cycles

and Trends within them so we identified

six sources of Mega Trends and we have

put an acronym called TR ndf for that's

like know easy recall on that right but

these six sources of Trends are

technology changes regulatory changes

economic changes for example changes in

standard of living of a

population uh nature or sustainability

which is very becoming very important

now absolutely uh demographic changes

whether your population is Young or

aging and and uh social changes which

actually Encompass say consumer

behavioral changes that what consumers

prefer at one point of Time Versus the

other so we look at these six areas as

sources of our Mega Trends right and

then we try to map that at this point of

time which are the trends we are seeing

in each of them right so that's how we

come to long-term changes so tell me n

have investors really benefited from

investing in megatrends

let's take decade by decade some

examples um let's say 1998 right um You

had Innovations in technology and the

Telecom industry which made remote

working possible so you can be uh

present as a developer of a software in

US versus you can be in India uh because

of good Telecom connectivity reducing

costs uh you are able to perform the

same function as if you were sitting in

the client's office in us so offshoring

took off as a way of new way of software

development

yeah and at that time the business

started moving to countries where you

had a large English speaking

population and who could be trained to

do this coding to look at uh uh it

development India at that time was the

most favorably positioned na we had a

large demographic benefit uh large

English speaking population and a young

population and we were able to deliver

value to customers in it at a very good

value now the changes in technology

combined with changes in demographics

actually led to a jump in the offshoring

business in the country and uh offshore

Outsourcing obviously a lot of Indian

companies took benefit of that

uh large it companies if you see became

10 Baggers 12 Baggers over this decade

of 1998 to 2008 that's right when the

Nifty returns were not much but you were

able to get benefit of uh the trend

changes in one or two particular sectors

let's take forward from there uh from

2008 onwards India's per capita income

started Rising very quickly we cross, of

per capita income for the first time uh

because of changes in the banking sector

you had more data available about the

loans that you giving about the Creditor

or the credit worthiness uh of the loans

and that led to Improvement in lending

standards right uh so regulatory changes

availability of data and changes in

economic front where per capita income

started Rising led to Boom in the retail

Lending

and uh you see companies nbfcs who were

on Consumer Finance or Retail Finance uh

Banks which were more retail oriented

they had a fantastic growth over that

decade between 2008 and 2018 absolutely

and uh you saw multibagger returns from

some of these companies which were able

to benefit or were on the right side of

this Mega Tren right interesting so how

does one really go about constructing a

mega Trends portfolio well this is

actually interesting Mega Trends

actually helps you create a top down

Universe right of companies that have

the potential to grow when we screen

companies on Mega Trends uh first we

identify the mega Trends from these six

sources of TR and DS right we overlay

each of these Trends on each sector okay

and from this SE uh these sectors we

find out which are the companies on the

right side of the Trend and which are

the companies on the wrong side of the

trend clearly the companies on the right

side of the trend have the Tailwind for

growth are the beneficiaries of changes

that are happening in the economy and

the businesses and they have the

potential to do well so that's our top-

down screening and that gives us the

universe of uh megatrend now there are

many companies where the potential may

not necessarily translate into business

or profits so then our team takes over

in terms of looking at the bottomup

screening of these companies how good is

the business how good is the management

here we look at four different points

one you should be a net net beneficiary

of the trend if you are benefiting from

one Trend but you are against the other

your business prospects get neutralized

or growth prospects get neutralized so

you have to be a net net beneficiary

second you have to have uh ability to

monetize that trend if you're providing

a product whether a good or a service

and your customer is not allowing you to

make even a single rupee of profit of

that then that business is not worth

being in uh I'm not saying you ignore

companies which go through a investment

phase sure but in the long run there

should be visibility of monetizing that

the third then we look at for capturing

that growth what kind of capital

investments will be required and

ultimately what kind of cash flows uh

will that business generate so it is

like doing a financial analysis of that

sure and last and also the most

important step is valuation right so

here we get two things uh from Mega

Trends investing style valuations tell

you whether the crowd has already

discounted that Trend so if uh you know

about the hype cycle right that many of

times people people get excited about

the technology change or so and they pay

exorbitant amount for that stock now we

want to avoid overpaying for that Trend

so we look for areas where the trend is

not fully discovered or it has gone

through that hype curve where the

potential for long-term growth is there

but the crowd is not really anticipating

or exciting they are underestimating the

growth uh with valuation the second part

that we get is how much weightage we

should put in the portfolio for that

company

uh if the upside is much higher that is

valuation is attractive we put a higher

weightage on that company in the

portfolio so nsh could you tell me how

different is Mega Trends from the

index oh that is a very very interesting

question let's see how the index works

first index typically is backward

looking sure it looks at businesses

which have been winners in the past

right and that's why they are at a large

size and then they are included in the

index some of the it companies actually

came into the major indices in the year

2000 right lot of infra property

companies came into the index in

2007 much after they had become

multi-baggers right and uh index also

treats losers the same if the company

has been losing for many many years uh

ultimately it becomes a small smaller

size in market cap and it is taken out

of the index some of the infra companies

these companies which corrected by 70

80% ultimately went out of the indices

in 2011 after 3 and a half four years of

extreme pain for the investors so index

is typically backward

looking uh if you want to look at Future

winners you need to have mega Trends

which actually focuses on looking

forward at which are the companies which

will be future winners and losers and

marks them from there in a way you can

say in many of these Mega Trends you

will find companies that will ultimately

come into the sure index the other way

is index is market cap or free float

market cap

weighted Mega Trend investing actually

aligns or assigns weight to the company

based on the return potential or their

valuations so that's how it is better

than invest uh index because it is

forward-looking and it puts the right

weightage is based on the potential of

companies rather than their size very

interesting so you know N I have one

final question I'm sure our audience

would love to know given the strong

performance of maaj fins flexi Cap Fund

in the last one year what are the kind

of Mega trends that we are

investing uh there are very very

exciting opportunities at this stage in

India we are talking about this in

decade being India's decade and there

are many Trends which are very exciting

to invest in which have a lot of growth

potential uh within the overall basket a

couple of them I'll mention so one of

them is financialization and

digitization where you see uh increasing

Investments uh towards say Financial

savings compared to physical savings by

the crowd that is leading to some of the

Capital Market businesses doing well uh

say Banks and financial services doing

well insurance companies doing well so

these are the exciting spots and in

India compared to some of the other

markets you are seeing financials at The

Cutting Edge of innovation also in terms

of it's not the finex just like you know

doing good business but it's the banks

and financial services companies

actually being ahead in digitization and

um adopting technology so that's a mega

Trend that we are excited about the

other trend is of a very defensive

looking sector which is Pharmaceuticals

okay contract research and Manufacturing

or custom drug development is an area

which is very exciting for uh growth

right now especially there are

regulatory changes which are impacting

this we are seeing uh us talk about the

bioc secure act where they want to

reduce their dependence on China for a

lot of drug development and clinical

research or uh contract research so this

is going towards uh India because India

is again best place like in it uh in the

'90s where this business can be done in

a fantastic way third if you look at

economic changes we are seeing a sharp

rise in per capita income more young

population participating in the

workforce household incomes are growing

faster we are seeing premiumization

lifestyle spending by uh the consumers

and that upgrade is leading to benefit

to so many companies in the consumer

discretionary sector the last one I'll

highlight is real estate real estate

typically has a cycle of 78 years right

in the last few years especially in the

last decade what we've seen is

consolidation within real estate so

number of developers have gone down uh

branded developers or developers which

are large have actually gained market

share right uh last year we also sold

the largest number of houses uh ever in

the country and in fact we are

surpassing only this year then that

means there's the benefit to a lot of

these listed property development

companies um they are also benefiting or

helping the downstream players which are

into sanitary wear Ceramics uh wires

cables consumer discretionary like uh

white goods and so on so that's an

exciting theme that again we are looking

on oh I must actually add one more uh

Power sector in India within infra we

are excited about the power sector and

the Renewables opportunity especially

here you will find in our portfolio we

have a investment in some of the most

significant power related players in the

country and those companies are seeing

fantastic growth they have visibility

for the next 3 to 5 years in terms of

revenue and profit growth and we have

invested at the right valuation with

them wow that's really interesting Mish

uh I think it's only matter of time

before you know Mega train investing

becomes mainstream and the whole

industry is adopting it because I think

the science and the logic is there to be

seen um you know and for our audiences

if they'd like to know even more about

Mega Trends we have a book authored by

nes that's available for download on our

website so thank you once again Nish for

taking the time and I leave you to now

going and actually investing in meat

Trends thank you thank you pleasure Ro

thank you so much mutual fund

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